Umbrella policy vs. multiple LLCs

7 Replies

A lot of people will recommend an LLC as it will protect your personal assess more that an umbrella policy would. However, it is typically the more expensive option. An umbrella policy is a good alternative so long as the damage doesn't go above the coverage amount, which is usually one million dollars. It really comes down to how much you are looking to insulate yourself. An LLC offers more, but costs more. An umbrella policy costs less, but caps what it will protect you on/against. There is a bit more too it than that, but that is the gist of it. You could also do both if you're feeling excessive.

Umbrella policy is simpler and cheaper.

Let's say you set up two LLCs. You have to keep separate accounts, checkbooks, paperwork, annual filings with the state, etc. I believe you also have to file separate tax returns. In my case, each LLC would cost me about $400 a year just to file taxes.

The point of an LLC is to protect your assets. Tenant falls and breaks their leg, decides to sue you. If someone sues you for more than your LLC is worth, you forfeit your assets within the LLC but everything outside the LLC is allegedly safe.

However, the average settlement is around $125,000. If you have a $2 million umbrella, there's almost no chance a tenant would sue you for that much and cause you to lose your assets.

In fact, ask around the Biggerpockets boards and see if you can find a Landlord that's lost an asset to a lawsuit.

Your best protection is to follow the law and treat your tenants honestly and fairly. Get an umbrella policy just in case.

As @Ned Carey said, everyone should have both at some point. Umbrella is the best option in the beginning as you aren't worth a lot yet, it's cheaper, and you will get better financing in your personal name. I just upped my umbrella to $2M which I know will protect me. LLC without a partner and it might as well be in your personal name. You can definitely still get sued.

Originally posted by @Bryan Laufenberg :

To protect my personal assets, is it better to form an LLC for each individual investment property I purchase, or to just get an umbrella policy?

If you set up an LLC Properly, and follow the Operating Agreement to the "T", don't mix funds, hold your required meetings and document Everything, you have a chance of your LLC surviving a court challenge and lawsuit. Break any of those rules and a good attorney will "pierce the veil" and you LLC is as protective as a screen door on a submarine. Get an umbrella insurance policy instead. Unless you have over $100,000 to protect, an LLC is simply a costly "feel good" purchase anyway.

I have consulted with my CPA and attorney and amy setting up multiple LLC's. I will have a a Trust owning a Master LLC, the master LLC will own individual LLC's. I the individual LLCs will flow up to the master which will file taxes. One bank account, one EIN. I am paying my attorney and CPA to structure it properly for my state.

There are no filing fees in LLC's in SC, just a one time set up fee.

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